The English language commentary is available, with German language available at a later stage

We are cautious on the prospects for Mexico, the region’s second-largest equity market. Mexico is vulnerable to a U.S. downturn, while we think measures taken to contain the spread of the coronavirus are likely to be a further blow to an economy that had already been stagnating before this crisis. However, we are finding investment opportunities in select pockets of the market and are keeping a close watch on developments.

Indicative Benchmark

Effective July 1, 2018, the “net” version of the indicative benchmark replaced the “gross” version of the indicative benchmark. The “net” version of the indicative benchmark assumes the reinvestment of dividends after the deduction of withholding taxes applicable to the country where the dividend is paid; as such, the returns of the new benchmark are more representative of the returns experienced by investors in foreign issuers. Historical benchmark performance has been restated accordingly.

The English language commentary is available, with German language available at a later stage

Following the precipitous sell-off seen in March, global equity markets experienced a sharp rebound in April, driven by considerable fiscal and monetary easing from countries across the world and signs of a stabilisation in coronavirus infection rates in some major countries. Both Latin American equities and emerging markets more generally rose in U.S. dollar terms but underperformed the MSCI World Index. The Brazilian market underperformed as domestic political uncertainties were a concern for investors. Mexican equities also underperformed. A major ratings agency lowered the country’s sovereign debt rating, citing risks to the domestic economy. At the portfolio level, stock selection in Argentina was beneficial. MercadoLibre, which operates the largest online trading platform in Latin America, saw its share price strongly outperform. We think MercadoLibre’s robust market position and experience in e-commerce will help it to capitalise on digital payments in a region where a significant portion of the population do not have access to traditional banking services. The company is also well-placed, in our view, to navigate the expected economic downturn, as it has a relatively strong balance sheet and an experienced management team. On the negative side, our long-standing underweight to the energy sector held back relative returns.

The English language commentary is available, with German language available at a later stage

While Latin American markets have been hit hard by the coronavirus crisis and it is unclear how long market turbulence will persist, periods like this can offer long-run opportunities. We believe our in-depth research and analysis will help us to identify such investment potential, and we have been using the insights gained to slowly take advantage of the sell-off and add to high-conviction names that we believe may be able to weather this uncertain environment and succeed over the longer term. Brazil remains our largest country position in absolute terms, and we have a small underweight here; during the period we reduced the size of this underweight. We reduced our exposure to Mexico and have a large underweight to this market; we are also underweight to Chile. We increased our overweight to Peru and Argentina.

Brazil

Brazil is set to be significantly impacted by the coronavirus crisis, with a recession likely, in our view, although the country's central bank and federal government have unveiled measures aimed at supporting the economy. Overall, our base case is that this is a setback but not a structural change for Brazil and that reform momentum and growth may resume in time. While we continue to view Brazil as the most attractive market in the region, the portfolio has a small underweight as we have a relatively low exposure to some of the more commodity-focused index heavyweights. We reduced the size of this underweight during the quarter as we have slowly been taking advantage of stock-specific opportunities that have opened up.

We initiated a position in Petrobras, Brazil's largest integrated oil company. Over the past couple of years, we think that asset sales, deleveraging, cost-cutting, and improvements in governance have improved the outlook for the company. The risk of government intervention appears to have reduced, in our view, and the stock price reached what we saw as an attractive level amid the broader market sell-off.

We reduced our position in Ambev, a beer and soft drinks producer and distributor. We have concerns that the company may struggle to turn around profitability in the near term. In our view, the company faces modest disposable income growth, a tough competitive environment, and limited pricing power.

Mexico

Mexico faces considerable challenges, and we believe it is likely to fall into recession this year. It is a relatively open economy and vulnerable to a downturn in the U.S.; business confidence has fallen sharply, and we think consumer confidence is likely to fall. On the positive side, the country's central bank has reduced interest rates, and we think there may be further cuts. We reduced our exposure during the quarter, in part for stock-specific reasons; the portfolio has a large underweight to this market.

We sold out of PINFRA, the largest transport infrastructure operator in Mexico. The company is looking to expand internationally. We think this could be perceived negatively by the market as a sign of a lack of opportunities domestically, particularly amid weak traffic dynamics and low visibility on new infrastructure projects.

We reduced our position in retailer Walmex, which operates supermarkets, discounters, membership clubs, supercenters, and apparel stores. The stock has been a relative outperformer amid the spread of the coronavirus. We trimmed our position in order to add to higher-beta names.

Peru

In our view, Peru appears to have the strongest macroeconomic buffers in the region with high foreign exchange reserves, low government debt, and a low current account deficit. The government has announced a sizable fiscal package aimed at containing the outbreak and supporting the economy. The country's central bank has also reduced interest rates. However, Peru is a relatively open economy, and we would also expect it to suffer a shock on the external side. Our main holding here is in financial services group Credicorp, which has a large domestic market share; we think the stock is trading at a highly attractive valuation on a long-term view. We increased our overweight to Peru over the quarter, as we purchased another banking name.

We initiated a position in Intercorp Financial Services, which has a sizable market share in loans and a market-leading position in credit cards. We see significant scope for growth in consumer loans, and in our view, the bank is successfully gaining share of retail deposits. Overall, we believe the competitive environment is rational. While we think expenses may remain elevated due to information technology (IT) investments and variable costs related to credit card growth, expense growth is set to slow, in our view.

Argentina

While we increased our overweight to Argentina, we are pursuing a highly selective investment approach. Macroeconomic conditions present considerable challenges both in terms of the impact of the coronavirus and the risk of sovereign debt default, and we continue to have concerns about the direction of government policy. Our approach is to focus on names with limited exposure to the domestic economy, and we added some positions during the quarter.

We purchased IT services company Globant. We believe the firm combines engineering skill and creative design to deliver digital services that primarily aim to help clients increase revenue, as opposed to traditional IT services firms that have generally been more focused on cost-efficiency initiatives. In our view, Globant has delivered robust fourth quarter 2019 results and 2020 guidance. The company has a strong balance sheet, and we expect the theme of investing in digital technology to continue beyond the current crisis.

We built a position in Despegar, Latin America's leading online travel agency. In our view, fourth-quarter results were much stronger than anticipated due to a rebound in Argentina ahead of travel tax increases. Given the coronavirus crisis, forward-looking guidance is not looking good, in our view, with bookings set to decline at a mid-teens pace, a weaker currency, and demand contraction in Argentina. We believe It is hard to gauge how long the impact on travel demand may persist, although as normalization occurs we think there may be a potential catalyst for the stock from the integration of a recent acquisition, Mexican travel agency Best Day, in the second half of this year.

Chile

Chile entered the crisis with an economy that was already contracting due to social unrest last year. While the country still has solid macroeconomic fundamentals, in our view, and the government has recently announced a considerable fiscal package aimed at containing the negative effects of the coronavirus, we think the fiscal deficit for this year is likely to be significantly higher than the current target. The country's central bank has also reduced interest rates. Chile is a relatively open economy, and copper (which has seen sharp price falls) is its main export; however, as an oil importer, Chile is a beneficiary of lower oil prices. Overall, the portfolio is underweight, and we eliminated our position in a retail name during the quarter.

We sold out of our position in omnichannel retailer Falabella, which operates department and home improvement stores, supermarkets, consumer credit finance, retail banking, and shopping malls. The company's profitability has come under intense pressure over recent quarters from a combination of cyclical and secular factors. Falabella has made several strategic decisions to accelerate its digital migration and thus strengthen its offering versus peers, but, in our view, these measures come amid a general slowdown in sales and may take time to bear fruit.

The English language commentary is available, with German language available at a later stage

The portfolio is overweight to the financials sector, where our highly-detailed research is helping us to find good investment potential across several countries including Brazil, Peru and Chile. One of our largest holdings in this space is Brazilian bank Itau Unibanco. Although we are expecting lower loan growth and net interest margins for Itau given the tougher economic backdrop, we believe this is reflected in the share price and continue to like this well-managed company.

The English language commentary is available, with German language available at a later stage

We are overweight to Peru. In our view, Peru appears to have the strongest macroeconomic buffers in the region with high foreign exchange reserves, low government debt, and a low current account deficit. The government has announced a sizeable fiscal package aimed at containing the coronavirus outbreak and supporting the economy. The country’s central bank has also reduced interest rates. However, Peru is a relatively open economy, and we would expect it to suffer a shock on the external side given the likelihood of a deterioration in global growth.

The English language commentary is available, with German language available at a later stage

We initiated a position in Petrobras, Brazil's largest integrated oil company. Over the past couple of years, we think that asset sales, deleveraging, cost-cutting, and improvements in governance have improved the outlook for the company. The risk of government intervention appears to have reduced, in our view, and the stock price reached what we saw as an attractive level amid the broader market sell-off.

We reduced our position in Ambev, a beer and soft drinks producer and distributor. We have concerns that the company may struggle to turn around profitability in the near term. In our view, the company faces modest disposable income growth, a tough competitive environment, and limited pricing power.

We sold out of PINFRA, the largest transport infrastructure operator in Mexico. The company is looking to expand internationally. We think this could be perceived negatively by the market as a sign of a lack of opportunities domestically, particularly amid weak traffic dynamics and low visibility on new infrastructure projects.

We reduced our position in retailer Walmex, which operates supermarkets, discounters, membership clubs, supercenters, and apparel stores. The stock has been a relative outperformer amid the spread of the coronavirus. We trimmed our position in order to add to higher-beta names.

We initiated a position in Intercorp Financial Services, which has a sizable market share in loans and a market-leading position in credit cards. We see significant scope for growth in consumer loans, and in our view, the bank is successfully gaining share of retail deposits. Overall, we believe the competitive environment is rational. While we think expenses may remain elevated due to information technology (IT) investments and variable costs related to credit card growth, expense growth is set to slow, in our view.

We purchased IT services company Globant. We believe the firm combines engineering skill and creative design to deliver digital services that primarily aim to help clients increase revenue, as opposed to traditional IT services firms that have generally been more focused on cost-efficiency initiatives. In our view, Globant has delivered robust fourth quarter 2019 results and 2020 guidance. The company has a strong balance sheet, and we expect the theme of investing in digital technology to continue beyond the current crisis.

We built a position in Despegar, Latin America's leading online travel agency. In our view, fourth-quarter results were much stronger than anticipated due to a rebound in Argentina ahead of travel tax increases. Given the coronavirus crisis, forward-looking guidance is not looking good, in our view, with bookings set to decline at a mid-teens pace, a weaker currency, and demand contraction in Argentina. We believe It is hard to gauge how long the impact on travel demand may persist, although as normalization occurs we think there may be a potential catalyst for the stock from the integration of a recent acquisition, Mexican travel agency Best Day, in the second half of this year.

We sold out of our position in omnichannel retailer Falabella, which operates department and home improvement stores, supermarkets, consumer credit finance, retail banking, and shopping malls. The company's profitability has come under intense pressure over recent quarters from a combination of cyclical and secular factors. Falabella has made several strategic decisions to accelerate its digital migration and thus strengthen its offering versus peers, but, in our view, these measures come amid a general slowdown in sales and may take time to bear fruit.

The English language commentary is available, with German language available at a later stage

Drugstore retailer Raia Drogasil is viewed as relatively defensive in a Latin American context, and while the stock fell sharply, it did so by considerably less than the Brazilian market and the benchmark index. We continue to like this high-quality company, which has built a drug retail platform that may be difficult for competitors to replicate. In our view, the firm also faces a low risk of mandatory store closures in the current environment.

Our avoidance of local index heavyweights America Movil (telecommunications) and FEMSA (beverages and convenience retailing) had a negative effect on relative returns. By contrast, our long-standing position in retailer Wal-Mart de Mexico (Walmex) added value, as the shares fell by much less than the Mexican market and the benchmark index. In our view, Walmex is a high-quality company, and we are impressed by the firm's use of technology to improve productivity and customer service.

The high level of volatility in investment markets saw shares in Brazilian stock exchange company B3 fall sharply, although they did so by less than the sector overall and the benchmark index. We retain our holding as we believe the balance between risk and reward for B3 is compelling at current levels; in our view, it is an excellent business with good management, net cash on the balance sheet, and an attractive valuation.

Shares in Peruvian financial group Credicorp sold off as the domestic equity market was hit by price weakness in commodities such as copper; however, the shares fell by less than the sector and the benchmark index. We continue to hold Credicorp, which, in our view, has a strong position in the domestic banking market, which accounts for the lion's share of its earnings.

Elsewhere in the sector, Brazilian bank Itau Unibanco underperformed against the background of marked weakness in domestic equities and the real. Although we are expecting lower loan growth and net interest margins for Itau, given the tougher economic backdrop, we believe this is priced in and we continue to like the company.

The English language commentary is available, with German language available at a later stage

While Latin American markets have been hit hard by the coronavirus crisis and it is unclear how long market turbulence will persist, periods like this can offer long-run opportunities. We believe our in-depth research and analysis will help us to identify such investment potential, and we have been using the insights gained to slowly take advantage of the sell-off and add to high-conviction names that we believe may be able to weather this uncertain environment and succeed over the longer term. Brazil remains our largest country position in absolute terms, and we have a small underweight here; during the period we reduced the size of this underweight. We reduced our exposure to Mexico and have a large underweight to this market; we are also underweight to Chile. We increased our overweight to Peru and Argentina.

Brazil

Brazil is set to be significantly impacted by the coronavirus crisis, with a recession likely, in our view, although the country's central bank and federal government have unveiled measures aimed at supporting the economy. Overall, our base case is that this is a setback but not a structural change for Brazil and that reform momentum and growth may resume in time. While we continue to view Brazil as the most attractive market in the region, the portfolio has a small underweight as we have a relatively low exposure to some of the more commodity-focused index heavyweights. We reduced the size of this underweight during the quarter as we have slowly been taking advantage of stock-specific opportunities that have opened up.

We initiated a position in Petrobras, Brazil's largest integrated oil company. Over the past couple of years, we think that asset sales, deleveraging, cost-cutting, and improvements in governance have improved the outlook for the company. The risk of government intervention appears to have reduced, in our view, and the stock price reached what we saw as an attractive level amid the broader market sell-off.

We reduced our position in Ambev, a beer and soft drinks producer and distributor. We have concerns that the company may struggle to turn around profitability in the near term. In our view, the company faces modest disposable income growth, a tough competitive environment, and limited pricing power.

Mexico

Mexico faces considerable challenges, and we believe it is likely to fall into recession this year. It is a relatively open economy and vulnerable to a downturn in the U.S.; business confidence has fallen sharply, and we think consumer confidence is likely to fall. On the positive side, the country's central bank has reduced interest rates, and we think there may be further cuts. We reduced our exposure during the quarter, in part for stock-specific reasons; the portfolio has a large underweight to this market.

We sold out of PINFRA, the largest transport infrastructure operator in Mexico. The company is looking to expand internationally. We think this could be perceived negatively by the market as a sign of a lack of opportunities domestically, particularly amid weak traffic dynamics and low visibility on new infrastructure projects.

We reduced our position in retailer Walmex, which operates supermarkets, discounters, membership clubs, supercenters, and apparel stores. The stock has been a relative outperformer amid the spread of the coronavirus. We trimmed our position in order to add to higher-beta names.

Peru

In our view, Peru appears to have the strongest macroeconomic buffers in the region with high foreign exchange reserves, low government debt, and a low current account deficit. The government has announced a sizable fiscal package aimed at containing the outbreak and supporting the economy. The country's central bank has also reduced interest rates. However, Peru is a relatively open economy, and we would also expect it to suffer a shock on the external side. Our main holding here is in financial services group Credicorp, which has a large domestic market share; we think the stock is trading at a highly attractive valuation on a long-term view. We increased our overweight to Peru over the quarter, as we purchased another banking name.

We initiated a position in Intercorp Financial Services, which has a sizable market share in loans and a market-leading position in credit cards. We see significant scope for growth in consumer loans, and in our view, the bank is successfully gaining share of retail deposits. Overall, we believe the competitive environment is rational. While we think expenses may remain elevated due to information technology (IT) investments and variable costs related to credit card growth, expense growth is set to slow, in our view.

Argentina

While we increased our overweight to Argentina, we are pursuing a highly selective investment approach. Macroeconomic conditions present considerable challenges both in terms of the impact of the coronavirus and the risk of sovereign debt default, and we continue to have concerns about the direction of government policy. Our approach is to focus on names with limited exposure to the domestic economy, and we added some positions during the quarter.

We purchased IT services company Globant. We believe the firm combines engineering skill and creative design to deliver digital services that primarily aim to help clients increase revenue, as opposed to traditional IT services firms that have generally been more focused on cost-efficiency initiatives. In our view, Globant has delivered robust fourth quarter 2019 results and 2020 guidance. The company has a strong balance sheet, and we expect the theme of investing in digital technology to continue beyond the current crisis.

We built a position in Despegar, Latin America's leading online travel agency. In our view, fourth-quarter results were much stronger than anticipated due to a rebound in Argentina ahead of travel tax increases. Given the coronavirus crisis, forward-looking guidance is not looking good, in our view, with bookings set to decline at a mid-teens pace, a weaker currency, and demand contraction in Argentina. We believe It is hard to gauge how long the impact on travel demand may persist, although as normalization occurs we think there may be a potential catalyst for the stock from the integration of a recent acquisition, Mexican travel agency Best Day, in the second half of this year.

Chile

Chile entered the crisis with an economy that was already contracting due to social unrest last year. While the country still has solid macroeconomic fundamentals, in our view, and the government has recently announced a considerable fiscal package aimed at containing the negative effects of the coronavirus, we think the fiscal deficit for this year is likely to be significantly higher than the current target. The country's central bank has also reduced interest rates. Chile is a relatively open economy, and copper (which has seen sharp price falls) is its main export; however, as an oil importer, Chile is a beneficiary of lower oil prices. Overall, the portfolio is underweight, and we eliminated our position in a retail name during the quarter.

We sold out of our position in omnichannel retailer Falabella, which operates department and home improvement stores, supermarkets, consumer credit finance, retail banking, and shopping malls. The company's profitability has come under intense pressure over recent quarters from a combination of cyclical and secular factors. Falabella has made several strategic decisions to accelerate its digital migration and thus strengthen its offering versus peers, but, in our view, these measures come amid a general slowdown in sales and may take time to bear fruit.